Christ Almighty if the Internet is such a wonderful tool of education HOW IS IT that the utter madness that is going on right now in the world of finance is allowed to continue? I have rarely felt as helpless and sick to the stomach as I do today… the facts are out there and nobody is facing up to the music and the fact that it WILL STOP again. Nothing has been fixed. NOTHING! Multiple trillion dollar compress bandages have been applied to the debt-clogged crater that once held the heart of the world economy and people are dancing around the maypole thanking the Lord for his miraculous bounty while the patient continues to hemorrhage internally. And all poor sods like me can do is tweet it and facebook it at whoever will listen like some apeshit crazy prophet of doom in neo-biblical times (because there will be another book of warning for future generations, most likely long after the Face has been ripped off this era of profligate insanity).
Rant off. Here’s what triggered it:
Why Is The US Taxpayer Subsidizing Facebook – And The Next Bubble?
Goldman Sachs … has effectively become a new form of Government Sponsored Enterprise. Goldman is not a venture capital fund or primarily an equity-financed investment fund. It is a highly leveraged bank, meaning that it borrows through the capital markets most of the money that it puts to work.
As Anat Admati (of Stanford University) and her colleagues tirelessly point out, the central vulnerability in our modern financial system is excessive reliance on borrowed money, particularly by the biggest players.
Goldman Sachs is a perfect example. Most of this firm’s operations could be funded with equity – after all, it is not in the retail deposit business. But issuing debt is attractive to shareholders because of the subsidies associated with debt funding for banks, and compelling to bank executives whose compensation is based on return on equity – as measured, this increases with leverage. If they have more debt relative to equity, that increases the potential upside for investors. It also increases the probability that the firm could fail – unless you believe, as the market does, that Goldman is too big to fail.
Social networking firms should be able to attract risk capital and compete intensely. They do not need subsidies in the form of cheaper funding (seen today as a more favorable valuation for Facebook) or in any other form.
Social networking is a bubble in the sense that email was a bubble. The technology will without doubt change forever how we communicate with each other, and this may have profound effects on the nature of our society. But investors will get carried away, valuations will become too high, and some people will lose a lot of money.
If those losses are entirely equity-financed, there may be negative effects but they will likely be small – in the revised data after the 2001 dotcom crash, there isn’t even a recession (i.e., there were not two consecutive negative quarters for GDP).
But if the losses follow the broader Goldman Sachs structure and are largely debt-financed, then the US taxpayer will have helped create another major financial crisis.
And if you think that sophisticated investors at the heart of our financial system can’t get carried away and lose money on Internet-related investments, read up on Webvan:
“During the dot-com bubble, Goldman invested about $100 million in Webvan, the online grocer that never got off the ground and eventually collapsed in bankruptcy.”